GDP growth is projected to be 2.2% in 2023, 1.2% in 2024 and 2.0% in 2025. Low business and household confidence, modest global growth and high uncertainty are holding back activity, although the tight labour market will support wage growth and private consumption, and the implementation of the Recovery and Resilience Plan (RRP) will boost investment. A progressive strengthening of external demand will support exports in 2024-25. As energy and food prices stabilise and labour demand slows, inflation will fall to 3.3% in 2024 and 2.4% in 2025.

The effects of inflation, tighter financial conditions and weak growth in Portugal’s main trading partners have curbed economic activity, although fiscal measures are providing some offset. GDP broadly stagnated over the second and third quarters of 2023. The strong recovery in the tourism sector and increasing RRP spending have supported activity. Yet, industrial production has slowed, and goods exports have declined. Consumer price inflation, which eased to 3.2% in the year to October, and rising debt servicing costs are reducing household consumption and investment. Despite historically high employment rates and wage growth, household and business confidence declined between August and October.

Fiscal policy is set to ease in 2024-25, with the budget balance projected to decline from 0.8% of GDP in 2023 to 0.2% in 2024 and 2025. Spending from RRP grants is expected to increase from 0.8% of GDP in 2023 to 1.9% in 2024 and 1.1% in 2025, boosting public consumption and investment. By contrast, most measures to help cushion the inflation shock will be phased out in 2024. These include the temporary cuts in energy taxes and VAT, the freeze of the carbon tax, as well as electricity, gas and fuel price subsidies. However, activity will be supported by further increases in public wages and the indexation of pension benefits, new targeted social transfers, the reduction in the personal income tax, prolonged mortgage subsidies, and new business tax incentives to raise investment. The minimum wage will also increase by 7.9% in 2024, with a further 4.3% rise expected in 2025, raising household income. However, the rise in labour costs could hold back low-wage employment and the foreseen large public investments and permanent personal income tax cuts could add to inflationary pressures in 2024.

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